Scaling Up the COVID-19 Crisis Response Now Will Avoid Higher Costs Later

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Friday, May 01, 2020 / 03:38 PM / by World Bank Group / Header Image Credit: World Bank Group

 

After a decade of uninterrupted growth, the global economy came to a sudden halt because of the COVID-19 pandemic.  The question now is not whether there will be a global recession but how deep it will be-and how quickly countries can overcome the health crisis and pave the way for economic recovery.


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The answers to these questions will be particularly important for developing economies, which are likely to be hit hardest by the crisis.

 

Even before the COVID-19 outbreak, most developing countries were already on a shakier economic footing than they were in the run-up to the 2009 global recession. Their growth had dropped to its lowest level of the past decade. Pre-2009 fiscal and current account surpluses had morphed into large deficits. External debt reached an all-time high.

 

These economies would have been hard pressed, in short, to mount an effective response even to a moderate global downturn. What they got instead was a simultaneous health and economic calamity without parallel in modern times.

 

At the World Bank Group, we are in the process of putting together detailed forecasts for our Global Economic Prospects report, which will be released in early June. The preliminary baseline scenario under consideration indicates that many developing economies are likely to tumble into outright recessions in 2020 before growth resumes next year.

 

This grim projection assumes that things will quickly go back to normal. For example, it assumes that social distancing and other mitigation measures are removed within three months and that all major economies resume rapid growth in the third quarter of 2020. It also assumes that financial markets will regain stability as investor confidence is swiftly restored. In addition, it presumes that large monetary and fiscal support packages will remain in place for the next 18 months.


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In a nutshell, it assumes that everything goes right. Even under these assumptions, the global economy would fall into a deep recession in 2020 and output of developing economies would shrink by roughly 2 percent.  This would not just mark the first contraction in these economies since 1960 but would also imply an astonishingly weak growth outcome relative to their average growth of 4.6 percent over the past sixty years.

 

Growth outcomes could be considerably worse if just one assumption fails to materialize. Even if three months of mitigation measures prove effective in halting the pandemic, investors and households could remain skittish or local or global supply chains may not be restored.  Households could curb consumption and businesses could postpone investments until they are confident of a robust recovery. International travel could resume in fits and starts. Under such a scenario, the hit to global output would be larger-and developing economies would end up experiencing a deeper recession that could reduce their output by nearly 3 percent.

 

Sharp economic contractions tend to cause long-lasting damage in developing economies, lowering potential growth for an extended period after the recession, with grave impact on poverty and inequality.

 

Policymakers have a narrow window to limit the pain-and shorten the duration-of the crisis. In developing countries, policymakers should do the best they can, focusing on the immediate priority-defusing the health crisis. They need to adopt policies that save lives, safeguard livelihoods, help businesses weather the downturn, and maintain access to essential public services-tailored to local circumstances as needed. They should also undertake measures to prevent the health crisis from flaring into a financial crisis.

 

But most developing countries cannot cope alone with the crisis because their circumstances are even more difficult. Health systems in some of these economies are grossly underequipped. Large segments of the population make their living in informal jobs, which means they lack a safety net and will be harder to reach and support in the midst of the crisis. Small- and medium-size firms tend to be a mainstay of economic activity but they typically lack access to capital, which means a liquidity problem for these firms could quickly turn into a solvency crisis.


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Developing economies likely to be hit hardest-those dependent on trade, commodities or tourism-tend to have higher concentrations of people in extreme poverty. In the face of income losses, such populations would have a more difficult time complying with mitigation measures. Overall, most developing countries lack the resources and the fiscal space necessary to employ policy packages that are large enough to support economic activity and get ahead of the crisis.

 

The World Bank Group and the IMF have responded in unprecedented ways, swiftly committing to deploy virtually all their lending capacity over the next 15 months to help developing economies manage the immediate response and speed up the recovery. And the G20 economies agreed to suspend official bilateral debt repayments for the poorest countries-at least through 2020-so that they can invest these resources in fighting the pandemic.

 

But much more is needed now to help developing economies. If the size of the policy response is not commensurate with the scale of the crisis today, the damage will require a much larger response later.  We need to close ranks across the world-not just governments and international institutions but also private creditors and businesses.

 

Collectively, we must mobilize our boldest response ever to overcome the worst crisis in generations.  It is still within the global community's power to avert the pandemic's most dire potential outcomes-but we must act decisively now to contain the harm and lay the foundation for a robust recovery.


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